Conducting Gender Pay Audits in a Changing Landscape

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​Gender pay equity laws have been popping up around the country and prompting more employers to review—and possibly alter—their compensation policies and practices.

The growing trend to prohibit employers from using prior salary to set starting pay is yet another compelling reason for employers to undertake proactive pay audits, said Mickey Silberman, an attorney with Fortney & Scott in Denver.

Though every employer likely has pay disparities, not all of them are unlawful, he noted. Some can be explained by differences in education, job-related experience and other permitted factors. Others cannot.

Through a pay audit, an employer can determine whether any vulnerabilities exist in its compensation structure and, more importantly, use it as a guide to take steps to redress any issues, explained Lara de Leon, an attorney with Ogletree Deakins in Orange County, Calif., and San Antonio.

Here's an added incentive: Several states now provide for a safe harbor or "affirmative defense" to liability when an employer conducts a pay audit and can demonstrate that it is taking good-faith steps to eliminate gaps.

Conducting an audit under attorney-client privilege is important. It can help protect certain aspects of the audit from disclosure to plaintiffs' attorneys during litigation or to investigators during a government audit.

"This protection will allow for freer discussions with legal counsel to aid in identifying and correcting pay issues," de Leon said. "The attorney-client privilege, however, is not bulletproof, and there may be certain instances where it is beneficial for an employer to disclose aspects of its audit."

Employers should consider creating a separate nonprivileged business document that explains the process and results, said Jonathan A. Segal, an attorney with Duane Morris in Philadelphia and New York City. Employers will want the analysis to be protected, but they may want to share certain information without potentially waiving the attorney-client privilege.

Recent Trends

In addition to new state and local laws that ban salary-history inquiries during the hiring process, the 9th U.S. Circuit Court of Appeals recently ruled that that a job applicant's prior salary can't be used to justify a wage differential between male and female employees under the federal Equal Pay Act (EPA). This holding overturned the appellate court's opposing conclusion in a 1982 decision that past salary was a permissible "factor other than sex" under the EPA.

The 9th Circuit judges looked closely at new state and local pay-equity laws and the arguments supporting them.

Here's how the reasoning goes for pay-equity laws: If a woman was earning $80,000 at a prior job and a man was earning $100,000, and an employer's policy was to offer new hires a 5 percent increase on current earnings, that would mean the woman would be offered $84,000 and the man would be offered $105,000. Furthermore, if they were both hired and received at the end of the year an identical performance score that qualified for a 3 percent raise, the woman's raise would be $2,520 and the man's raise would be $3,150. So the employer's "neutral" policy would prolong gender-based disparities.

The trend is to stop perpetuating the pay gap, Silberman said.

But there's disagreement among the federal appellate courts. For example, the 7th Circuit has held that past pay can be a factor, other than sex, that employers may use to determine wages under the EPA.

"What's clear at this point is that there are different standards in different locations on whether employers can consider salary history," said Avi Kumin, an attorney with Katz, Marshall & Banks in Washington, D.C.

Employers should first and foremost look to the applicable laws in their area—not just for the circuit in which they operate, but also on a state level, de Leon said. The various state laws may have different definitions, criteria and burdens of proof.

The Society for Human Resource Management (SHRM) "vigorously supports equal pay for equal work, with allowable pay differences based on factors not prohibited by law, and believes that any improper pay disparities should be promptly addressed," according to SHRM's public-policy issue statement on compensation equity. In addition, SHRM asserts that salary history should not be a factor in setting compensation—such decisions should be based on the value of the position to the organization, competition in the market and other bona fide business factors. However, employers should be able to discuss pay expectations or provide the pay range for the position sought.

Audit Steps

While it's becoming harder to have a uniform approach, "with some thought and discussion, employers can establish a defensible compensation structure that aligns with their core principles," de Leon said.

She noted that the steps to conducting an audit remain largely unchanged:

An audit should be conducted under the attorney-client privilege, and an employer should carefully consider which jobs, locations or business units it wants to assess.

An employer should also consider what data it has available to include in the audit that would potentially impact pay. Factors typically include job title, pay grade, time in the role, work location, business unit and performance history. Other factors may include education, special skills and experience.

If a disparity exists that cannot be explained by legitimate factors, then an employer needs to take steps to correct the disparity—which often means raising someone's pay.

"Employers should look at correcting the cause of the disparity, as well as correcting it monetarily," de Leon said. "Otherwise, a disparity will just repeat in the future."

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Members may download one copy of our sample forms and templates for your personal use within your organization. Please note that all such forms and policies should be reviewed by your legal counsel for compliance with applicable law, and should be modified to suit your organization’s culture, industry, and practices. Neither members nor non-members may reproduce such samples in any other way (e.g., to republish in a book or use for a commercial purpose) without SHRM’s permission. To request permission for specific items, click on the “reuse permissions” button on the page where you find the item.